|By Tim Courtney, Chief Investment Officer
We have used two avenues to address this year’s economic challenges amid the pandemic. First, when markets were falling so quickly1 that market liquidity began drying up and even some safer assets were faltering, the Fed swiftly cut interest rates to zero, provided lending facilities and actively purchased securities.2 These steps stabilized markets and supported prices for bonds, stocks, commodities and homes.
The second avenue was fiscal policy. The U.S. government put together a sizeable package that included checks for individuals and increases to unemployment benefits.3 This was meant to keep deteriorating household finances afloat until companies could restart their operations and hiring post shutdowns.
The Fed has done its part, and probably then some. The focus is now on how fiscal stimulus can sustain households through a period of gradually improving employment.
Ideally, you would like for “stimulus” to do what it is supposed to do: stimulate greater economic activity. That is not really what the first round of fiscal spending did, though. Households used much of those checks to pay down debt and greatly increase savings.4 Going into the pandemic, we had a savings rate of about 7%.5 By contrast, April and May saw savings rates of 24% to 33% as households did the responsible thing and prepared for a tough year ahead.5
We believe we will almost certainly get another round of fiscal spending soon.6 Many of the companies that were counted on to rehire workers remain weak or have shuttered their doors. Some of this has been caused by consumer choice, some by government choice. This has hampered a healthier recovery from forming and left claims for unemployment elevated.7
While a second round of spending may not have immediate economic effects, it very well could lay the foundation for a long-term recovery. Household finances should improve with less debt overhang, lower rates and more money in savings. This, along with an improving hiring environment, should boost household confidence and help spur deferred spending and growth in future quarters.
We should note that none of this happens in a vacuum. There are costs to shutting down the economy and implementing these measures. As savers, cash pays virtually nothing, and bonds can generate only very low returns. With national spending and debts accelerating, we also face the risk of future inflation and/or dollar weakness. The Fed has recently said it would be willing to let inflation run higher than its 2% target for some time.8
We think the political pressure will force at least one more round of stimulus spending. It will be yet another cost of the pandemic, but will likely lay the foundation for future growth, spending and an earnings recovery.
1. Yahoo! Finance (data as of 10/16/20) – S&P 500
2. Brookings Institution (6/12/20) – What’s the Fed doing in response to the COVID-19 crisis? What more could it do?
3. NBCNews.com (3/25/20) – Senate passes massive $2 trillion coronavirus spending bill
4. MarketWatch (8/20/20) – What did people do with their $1,200 stimulus checks? Finally an answer
5. Trading Economics (data as of 10/13/20) – United States Personal Savings Rate
6. CNBC.com (10/9/20) – Another $1,200 check may be on its way. Here’s what you need to know
7. Bureau of Labor Statistics (10/2/20) – The employment situation — September 2020
8. NBCNews.com (8/27/20) – Fed will let inflation rise and target jobs
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.